As a follow-up to our July post on New Jersey state budget problems threatening public construction projects, the political fight over funding New Jersey’s Transportation Trust Fund (“TTF”) finally ended on September 30, 2016. Governor Chris Christie and the legislature agreed to a compromise whereby the TTF will be reauthorized for eight years and funded with an additional 23 cent per gallon gas tax, for a total funding of $2 billion per year. As part of the compromise, the estate tax will be phased out by 2018, the sales tax will be reduced by 3/8th of a point, and other credits and deductions will be added to the NJ tax code.

[Note from the Editor: Due to an inadvertent editing error, omitted from our post entitled NJ Supreme Court Gets It Right! Consequential Damages Caused By A Subcontractor’s Defective Construction Work Is Insured was the fact that the property damage at issue occurred after the project was completed. The insurance coverage at issue in the case was completed operations coverage included in the commercial general liability form. The corrected article appears below.]

Over the past year, many states experienced budget crises that threaten public works spending and, in some cases, caused entire project shut downs. In Pennsylvania, a stalemate over the budget for Fiscal Year 2016-2017 lasted almost nine months, causing companies and non-profit grant recipients who had contracts with the Commonwealth to suspend their services or temporarily close. In New Jersey, Governor Christie and the legislature deadlocked over taxes, including an increase to the gas tax that would fund the Transportation Trust Fund (“TTF”). As a result, Governor Christie issued Executive Order No. 20, which shut down all construction projects funded by the TTF that were not “absolutely essential for the protection of the health, safety, and welfare” of New Jersey citizens. The Executive Order was issued on June 30, 2016, a list of projects subject to shut down was published on July 6, 2016 and the projects were shut down by July 8, 2016.Continue Reading State Budget Problems Threatening Public Construction Projects: 5 Key Points to Remember

On February 12, 2016, New York City Mayor Bill de Blasio and New York City Department of Buildings Commissioner Rick Chandler announced a new aggressive campaign to improve worker safety on construction sites. Specifically, commencing next Tuesday, February 16, rigorous safety sweeps of constructions sites ten stories or less are expected to be performed.

Doubtlessly, this initiative is a direct result of 1) an increase in construction related deaths in 2015, and 2) the investigation into the death of a worker on a project at Ninth Avenue that resulted in, among other things, the August 5, 2015 indictment of Harco Construction and its site safety manager for manslaughter and the debarment of Harco for safety violations.

In 2015, there were 11 deaths on New York City construction sites during which time there has been a 300% increase in construction in the City. However, in an unexpected development, 70% of all accidents occur at building sites of less than 10 stories.

In April, the New Jersey Supreme Court agreed to review the case of Waste Management of New Jersey, Inc. v. Mercer County Improvement Authority. The matter concerns a defect in a bid submitted under the New Jersey Public Contracts Law (“LPCL”). This case proves, yet again, that it is critical to pay close attention not just to the requirements of the public bidding laws, but also to the requirements contained in the bid specifications.

The LPCL has five mandatory items that must be included in a bid: (1) a bid bond, (2) a consent of surety, (3) a disclosure of corporate ownership pertaining to shareholders owning 10% of more of the corporate stock, (4) a list of certain required subcontractors and (5) an acknowledgment of the bidder’s receipt of any revisions to the bid documents. Failure to include any of these five items is considered a fatal defect requiring rejection of the bid. For all other bid defects, the New Jersey courts consider whether the defect is material and non-waivable based on a two-part test: (1) whether the waiver would undermine the public body’s assurance that the bidder will enter into and perform the contract according to its requirements and (2) whether the waiver of the defect would adversely affect competitive bidding by giving one bidder an advantage over other bidders?

In Waste Management, the bid specifications required bidders to submit a legal opinion regarding the enforceability of the contract to be executed by the Authority and the successful bidder. The Authority included a form for this legal opinion in the bid documents, which consisted of three assurances: (1) the bidder had full corporate power to execute the contract, (2) the contract was binding on the bidder and (3) the contract was enforceable.

Republic Services of New Jersey, L.L.C. (“Republic”) was the low bidder. Waste Management was the second lowest bidder. However, with its bid, Republic’s counsel submitted a letter that addressed the three legal opinions and did not use the provided form. Additionally, for the third opinion in the letter, Republic’s counsel concluded that certain provisions of the contract might be unenforceable but those questionable provisions did not substantially interfere with the intended benefits of the contract. Due to the letter format and the additional language, the Authority considered Republic’s bid materially defective.

Because Waste Management failed to include the required disclosure of corporate ownership, its bid was also rejected. The Authority then re-bid the contract and Waste Management was deemed the low bidder. Both Republic and Waste Management challenged the Authority’s decision to re-bid the contract and the trial court held that the Authority properly rejected the bids.

On appeal, the Superior Court, Appellate Division held that rejection of Waste Management’s bid for failure to disclose of corporate ownership was proper. However, it reversed as to Republic. Applying the two-part test for materiality, the court determined that Republic’s legal opinion did not deprive the Authority of its assurance that the contract would be entered into and performed according to its requirements. Further, the court determined that the different letter format of the legal opinion would have no effect on competitive bidding. As such, the court directed that the contract be awarded to Republic. The Authority has appealed the Appellate Division’s ruling to the New Jersey Supreme Court, and we will report on the Supreme Court’s ruling when it is issued.

As should be evident from this article, the parties, including the public body, have spent thousands of dollars litigating what, to the outside, may seem like rather inconsequential details. Because of the competitive nature of public bidding, any defect contained in a low bid, no matter how trivial, will likely result in a challenge from another bidder; especially when millions of dollars in new work are at stake. As a result, it is critical to pay close attention to adhering not just to the required items under all public bidding laws, but also to the requirements contained in the provided bid specifications. If you are unsure if your bid complies with either the public bidding laws or the bid specifications, please contact us before you submit it so that we can assist you in order to ensure that your bid is compliant.

In the construction industry, mediation has become an extremely popular vehicle for resolving disputes that develop during and after projects. It is particularly appealing because (i) it can provide an early opportunity for the parties to resolve a case in lieu of more protracted and expensive litigation and (ii) if the case does not resolve, the communications, factual, and legal positions taken during the mediation will remain confidential and cannot come into play at trial.

The Case

Last month, the New Jersey Supreme Court handed down a decision that may profoundly affect these fundamental principles of mediation in New Jersey. In Willingboro Mall, Ltd. v. 240/242 Franklin Avenue, LLC, the Court addressed two key mediation issues: (i) whether verbal settlement agreements reached at mediation are enforceable and (ii) whether communications made in the course of such discussions are privileged from future disclosure. The Court issued two essential holdings that apply to mediations taking place in New Jersey. First, from now on, settlements reached at mediations that are not reduced to a written agreement and signed by the parties before the mediation comes to a close will not be enforceable. Second, while communications occurring during mediation ordinarily are considered privileged and confidential, that privilege can be waived by a party.

How Did The Owner Waive The Mediation-Communication Privilege?

In Willingboro, the owner of the Willingboro Mall sued a buyer over the terms of the sale. At the trial court’s direction, the parties mediated their dispute and, at mediation, agreed upon settlement terms verbally. When the buyer advised the Court that the parties settled, the property owner balked, sparking litigation over whether a settlement agreement was in place. The buyer asked the court to enforce the verbal agreement, and, in response, the seller asked the court to not to enforce it. In support of their arguments, both sides revealed communications that took place during mediation. The Supreme Court found that the owner waived the mediation-communication privilege by referencing the confidential mediation communications in its opposition to the buyer’s motion to enforce the settlement agreement. According to the Court, if the seller wanted to preserve the confidentiality of the negotiations that took place during mediation, it should have asked the court to strike the buyer’s motion without disclosing confidential mediation communications in its response.

What Are The Future Implications Of This Case?

Despite ruling that the parties’ verbal settlement agreement was enforceable, the Court held that, going forward, in order to be enforceable, settlement agreements reached at mediations in New Jersey will need to be executed in writing either before the completion of the mediation or immediately thereafter during an extension of the mediation “for a brief but reasonable period of time.” Since settlements are often reached and formalized during the days and weeks after a mediation session, parties in this situation would be wise to agree in writing that the mediation will remain open for a definitive time period so that a settlement down the road is not undermined by the Supreme Court’s ruling in Willingboro Mall. Interestingly, the Court seemed to suggest that an audio- or video-recorded agreement could meet the written agreement requirement.

With regard to the mediation communication privilege, while, as a general rule, communications between parties at mediation remain confidential and are not subject to disclosure, the Willingboro Mall case serves as a cautionary reminder that a party seeking the protection of the privilege invoke it before making a disclosure that could waive it.

Tony Byler is a Partner at Cohen Seglias Pallas Greenhall & Furman PC and a member of the Construction Group. As a trial lawyer, he focuses his practice on representing public and private owners, contractors, subcontractors and material men.

Kathleen M. Morley is an Associate with Cohen Seglias Pallas Greenhall & Furman PC and a member of the Construction Group.

A few weeks ago, the New Jersey Supreme Court issued a decision that could have a profound effect on members of New Jersey’s construction community. In Town of Kearny v. Louis F. Brandt, the Court issued two major holdings: (i) under New Jersey’s Statute of Repose, an architect with construction administration responsibilities cannot be sued for defective work more than ten years after the first temporary certificate of occupancy (TCO) is issued; and (ii) if a party is dismissed because more than ten years has elapsed since its work, the jury may still consider the dismissed party’s contribution to any damages for the purpose of determining liability for the remaining parties to the litigation.

What Is a Statute of Repose and Why Does It Matter?

For those who possessed the courage to continue reading beyond that “legal mumbo jumbo,” a Statute of Repose is a law that protects design professionals and contractors from indefinite liability. In New Jersey, the Statute of Repose bars all litigation arising out of construction defects discovered more than ten years after the performance of the work. For instance, a structural engineer need not worry about being sued for a latent design defect that surfaces twenty years after it performed the design work.

In Town of Kearny, construction of a public safety facility started in 1994, and the Town sued the architect, soils engineer, and structural engineer for latent structural defects on April 7, 2006. The Court decided that for professionals like the architect whose responsibilities continue through construction, the ten-year Statute of Repose begins to run when the project reaches substantial completion. In this case, the Court decided that substantial completion occurred on April 9, 1996 when the first TCO was issued giving the owner until April 9, 2006 to sue the architect.

For the soils and structural engineers who were hired to perform more finite and limited services, the ten-year period began to run at the conclusion of their specific tasks. Since the soils and structural engineers completed their work more than ten years before the owner filed suit, they were dismissed from the case, leaving only the architect subject to liability.

What Happens to the Architect Now That Other Potentially Responsible Parties Have Been Dismissed?

In cases with multiple defendants who may have collectively contributed to the damages plaintiff suffered, the jury is asked to determine – on a percentage basis – each party’s responsibility. For instance, if a jury awards a verdict of one million dollars and finds two defendants each fifty percent responsible, respectively, then each defendant is liable to the plaintiff for $500,000.00.

But what happens in situations like Kearny where two of the parties who may have been responsible for the Town of Kearny’s damages were dismissed on a statutory technicality? The Court decided that even though the soils and structural engineers are immune from judgment by way of the Statute of Repose, the jury should nonetheless consider their contribution to the Town’s damages because the purpose for the rule requiring juries to determine each party’s contribution to the damages is so that each party pays for the damages it actually caused. In other words, if the architect is responsible for less than 100% of the town’s damages, it would not be fair for the architect to pay 100% simply because the other defendants were dismissed by way of the Statute of Repose.

The Lesson

While the discovery of latent construction defects can be outside of the owner’s control, owners should nonetheless be mindful that New Jersey’s Statute of Repose does not treat all contractors and professionals equally. For those with limited responsibilities that began and end prior to the project’s overall completion, the clock to file a lawsuit begins ticking once the specific work is completed. For those with construction management or administrative responsibilities, the clock begins to run when the project is substantially complete.

Without agreement among the parties as to substantial completion, Town of Kearny tells us that a court will likely utilize the issue date for the first TCO. Owners can guard against the “ticking clock” by keeping a close watch on the various completion dates for each trade. Meanwhile, designers and builders can ensure that the clock is ticking by being vigilant with the submission and approval of critical project documents such as certificates of substantial completion.

Jonathan A. Cass is a the Chair of the Insurance Coverage & Risk Management Group at Cohen Seglias Pallas Greenhall & Furman PC. He has extensive experience representing insureds and insurers in insurance coverage disputes.

Daniel E. Fierstein is an Associate in the Construction Group of Cohen Seglias and focuses his practice on construction law.

On April 11, 2013, the United States Small Business Administration (SBA) announced that $19 million in grants will be made to SBA resource partners to support small business recovery in the wake of Hurricane Sandy. The funding is part of a package approved by Congress in January to meet the demand for expanded SBA assistance including counseling, training, and technical assistance through Small Business Development Centers (SBDs), SCORE, and Women’s Business Centers (WBCs).

The first phase of the counseling and technical assistance funding totals $5.8 million, and will be distributed among the SBA resource partners in 11 states. The majority of this funding will be focused in New York ($2,394,000), New Jersey ($1,385,000), Connecticut ($527,000), and Pennsylvania ($410,000).

The second phase of funding, totaling $13.1 million, will be issued through the SBA resource partners to provide long-term small business recovery and expansion, with an emphasis on building creative community-based partnerships.

The SBA has so far approved disaster loans totaling $1.8 billion to individuals, and $279 million to businesses and non-profits recovering from Hurricane Sandy.

In January, Governor Chris Christie signed an Executive Order and proposed emergency regulations to guide the rebuilding process after Superstorm Sandy in flood prone areas of New Jersey. Before the storm, the building code and flood-proofing regulations in the state were based on flood maps adopted by the New Jersey Department of Environmental Protection (“the Department”) in the 1970’s and 1980’s. Unfortunately, these maps underestimated the 100-year flood elevations by anywhere from one to eight feet. The Federal Emergency Management Agency (“FEMA”) is in the process of reevaluating its flood maps for New Jersey. One of the changes, which will have a widespread effect, is the adoption of FEMA’s 100-year flow rate maps, including advisory, proposed or effective mapping. Owners and their contractors rebuilding in New Jersey will need to consider FEMA’s most recent maps (the “New Maps”), regardless of whether the map at issue is considered to be final and approved. All of these maps are available on FEMA’s website.

The Executive Order and the emergency regulations propose the following for construction in flood-prone areas:

A building is substantially damaged if the cost of restoring it to its original condition would equal or exceed 50% of the market value of the structure before the storm damage occurred.

An individual permit for reconstruction of a home that has suffered substantial damage due to the storm may not be issued by the Department unless the lowest floor of the home is constructed or modified such that it is set at least one foot above the elevation set by the New Maps.

The “lowest floor of a building” only includes a space which may be used for permanent or temporary occupation and does not include a crawl space, entryway and or garage if it is used for building access, parking or storage.

The Department may issue an individual permit for reconstruction of a commercial building that has suffered damage due to the storm that is not set at least one foot above the elevation set by the New Map map if an architect or engineer certifies that the building will be constructed in accordance with flood-proofing requirements.

The regulations also permit, for the first time, that commercial buildings be “wet flood-proofed.” Wet flood-proofing allows for flood waters to move freely in a building without damaging the structural integrity of the building.

When a property owner plans to rebuild, a permit need not be sought from the Department as long as the “footprint” of the building is not increased by more than 300 square feet, the lowest floor of the building is built at least one foot above the elevation set by the New Map, any basement or ground floor garage is not used for habitation, and the building is not moved closer to any large body of water or into a floodway. This will save the owner the cost of a permit fee.

According to the regulations, building owners who seek to comply will qualify for assistance from FEMA to help cover the cost of the work associated with complying with the regulations. Since the new FEMA maps will likely place more properties in flood zones than before the storm, while other properties will be placed in more severe flood zones, flood insurance premiums will rise substantially for some New Jersey property owners. But, FEMA anticipates that property owners who chose to comply when rebuilding could see their flood insurance premiums drop by more than 200%.

Have an opinion?

The regulations were adopted via an Executive Order, but will become permanent after an abbreviated comment period from the public. A public hearing on these proposed regulations is scheduled for Thursday, March 7, 2013 at 5:30 pm at the City of Long Branch Municipal Building, Council Chambers, 344 Broadway 2nd Floor, Long Branch, New Jersey 07740.

Suppliers frequently provide supplies on lines of credit to contractor customers who are involved in multiple construction projects. In an ideal world, both the customer and the supplier would maintain accounting records keeping each construction project and the payments attributable to those construction projects separate and accurate. Out of practical convenience, however, contractors and the suppliers sometimes lump projects and payments into a single account, making it difficult, if not impossible, for the supplier to determine which payments apply to each ongoing project, i.e., a task that is necessary for a supplier seeking to assert a mechanics’ lien claim against a particular project when its customer fails to timely pay.

Several weeks ago the Appellate Division of the New Jersey Superior Court, in L&W Supply Corporation v. Joe Desilva, described the affirmative duty suppliers have to determine the source of its customers’ payments for materials, by requiring suppliers to ask. According to the Court, a supplier who fails to do so “sacrifices its rights under the Construction Lien Law.” A brief review of the evolving mechanics’ lien laws relating to suppliers helps explain the Court’s potentially severe ruling.

New Jersey’s Construction Lien Law

The New Jersey Construction Lien Law (“Lien Law”) allows contractors and suppliers who are owed payment for work or materials on privately procured projects to file a lien against the property where the improvements (labor and supplies) were constructed. The lien encumbers the property, which prevents the owner from selling or transferring the property without first dealing with the contractor’s or supplier’s payment claim.

The purpose of the Lien Law is twofold: first, to secure payment of money due to contractors and suppliers; and second, to protect owners from paying more than once for the same work or materials. In order to protect owners from being forced to pay twice for the same work or materials, the Lien Law provides that the value of a lien cannot exceed the value of the “lien fund,” which, in the simplest terms, is the amount of money that remains unpaid on the job.

Suppliers’ Evolving Affirmative Duty to Inquire into the Source of Payments

In 2004 the New Jersey Supreme Court held, in Craft v. Stevenson Lumber Yard Inc., that a material supplier who files a construction lien has a duty to allocate payments from the material purchaser to the appropriate construction project when the supplier has “reason to know” that the payment is associated with a particular project. In other words, if a general contractor pays a subcontractor for work on a specific job and the subcontractor then pays its supplier, the supplier must apply the subcontractor’s payment to the same project account. The supplier may not simply apply the payment to an older receivable from a different project. This requirement protects the owner from double payment because it helps to ensure that when a supplier files a construction lien relating to a particular project, the supplier is not seeking monies owed from the subcontractor on a different project.

L&W Supply: The Supplier’s Duty Explained

In L&W Supply, the Appellate Division clarified the circumstances that would give a supplier “reason to know” the source of the payment. The Court held that in order to ascertain the source of a subcontractor’s funds, “a supplier must take some action, and an inquiry about the source of the funds is the most obvious action to take.” In other words, suppliers providing material to New Jersey projects must now affirmatively inquire as to how payments should be allocated when the purchaser has not otherwise provided reliable instructions as to how the payment should be allocated. As the Appellate Division held, “when the purchaser of materials has not provided specific, reliable instruction as to the allocation of its payment, or when the circumstances are such that a reasonable supplier should suspect the purchaser has not used an owner’s funds to pay for materials supplied for that owner, then the supplier must make further inquiry and attempt to ascertain the source of the payment funds so that it can allocate them to the correct accounts.”

The Court’s decision in L&W Supply means that suppliers must be diligent in ascertaining the source of the funds that it receives from its customers, and we recommend that the supplier should memorialize its efforts in writing. This should be done in writing because a supplier who files a lien claim after this L&W Supply decision must anticipate that the owner or general contractor will defend against the lien claim by (i) challenging the accuracy of the supplier’s accounting and (ii) questioning the sufficiency of the supplier’s inquiry into the subcontractor’s accounting. Documented efforts by the supplier to ascertain the source of payments are the best way to overcome those challenges because they demonstrate the supplier’s good faith efforts to inquire and accurately account for customer payments.

Tony Byler is a Partner at Cohen Seglias Pallas Greenhall & Furman PC and a member of the Construction Group. As a trial lawyer, he focuses his practice on representing public and private owners, contractors, subcontractors and material men.

Daniella Gordon is a litigation Associate in the Construction Group. She represents clients in a wide range of construction related matters, including public bidding contests, construction defect claims, and appeals.

About the construction Law practice group

Since the Firm was established in 1988, our attorneys have represented every potential party to a dispute on a construction project, including owners, developers, sureties, design professionals, contractors, subcontractors and suppliers. We have litigated, arbitrated and mediated cases from Maine to Florida and from New Jersey to Hawaii. Over the years, we have worked for our clients on virtually every type of construction project including: major office buildings, stadiums, hospitals, shopping centers, condominiums, government buildings, bridges, water treatment plants, petro-chemical plants, highways, airports, factories, and schools.